Revenue at Pacific Biosciences of California (NASDAQ:PACB) jumped 118% year over year, but don't get too excited yet.

The quarter included a previously disclosed $10 million milestone payment from Roche for reaching development milestones for the diagnostic products that Pacific Biosciences is developing for the Swiss healthcare giant. If you back out payments from Roche, product and service revenue was up a more subdued 16.5% year over year.

Pacbio

PacBio RS II Source: Pacific Biosciences.

If you look at a quarter-over-quarter basis, revenue from product and service fell from $14 million in the first quarter to $11.3 million in the second quarter. The culprit seems to be instrument sales that dropped quarter over quarter, but management stressed that the sales can be choppy because of timing of the installations. For the first six months of the year, instrument sales are up 13%, compared with the same period in 2014.

The Beijing Genome Institute, or BGI, one of the world's largest genomic sequencing centers, has finally purchased a Pacific Biosciences SMRT machine. Since BGI is a service business offering sequencing for academics and other companies, Pacific Biosciences is hopeful that BGI may order more instruments to provide sequencing of DNA in the niche that Pacific Biosciences' machines are most useful.

Instrument sales are clearly the key to driving revenue from consumables. The average machine is using more than $130,000 in consumables per year, so the more instruments Pacific Biosciences can place, the higher revenue in future quarters should be.

The large increase in revenue that comes with a 100% profit margin helped Pacific Biosciences' bottom line, but the company still lost money in the second quarter to the tune of $11.9 million.

Looking forward
Keep this quarter's 118% revenue increase in mind next quarter, because we're going to see the opposite phenomenon in Q3. The year-ago quarter included the first $10 million milestone payment from Roche, but Pacific Biosciences doesn't expect to earn a milestone payment in the third quarter of this year. In the fourth quarter, we'll flip the other way, because Pacific Biosciences believes it's on track to reach the third of four development milestones, triggering a payment in the fourth quarter.

Add up all this year's up-and-down quarters, and Pacific Biosciences is expecting 2015 revenue to be at least 40% higher than 2014. Even with the milestone payments, it'll continue burning through cash along the way. Pacific Biosciences ended the second quarter with $72.7 million in cash and investment and pledged to have at least $50 million in the bank at the end of this year, which is enough to keep the company afloat for a year.

Not coincidentally, that'll get the company through the delivery of the first clinical in vitro diagnostics products to Roche, scheduled for the second half of next year. While the opportunity for new products sounds impressive, investors have been fairly in the dark about how big the opportunity may be. Fortunately, management promised to give an update on the third-quarter conference call, so investors won't have to wait too much longer.

Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Pacific Biosciences of California. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.